Stock Market Forecasts are Mostly Worthless

A recent article in The New York Times suggests ignoring the predictions of Wall Street strategists in favor of investing in cheap, diversified index funds.

“Strategists, some of whom are very smart, are issuing precise predictions for where the market will be in 12 months and they look authoritative,” the article says, adding, “The record shows that they are not as rock-solid as they appear. In fact, many Wall Street strategists are flagrantly inaccurate.”

While many strategists get it right when it comes to the broad direction of the market, the article says, they run into trouble with more granular predictions, “like how high or low the market will go in a given year” and these predictions “should be treated as fiction.”

The article cites data provided by research firm Bespoke Investment Group, which compared Wall Street consensus forecasts for every calendar year since 2000 with the S&P 500 one year later. The data showed the following:

  • The median forecast was that the stock index would rise by 9.8 percent within the following year, but the S&P 500 rose by 5.5 percent.
  • The gap between the median forecast and the actual market return showed a discrepancy of almost 45 percent (4.31 percentage points).
  • The median forecasts called for a rise in the stock market every year for the last 20 years, but it fell in six of those years.
  • The consensus was wrong about the basic direction of the market 30 percent of the time.

A more reliable way to make investment decisions, the article explains, is to focus on “long-term historical data on the broad returns of the stock and bond markets” which shows that “stocks outperform bonds over extended periods, but that stocks are far more volatile than bonds.” Holding both, it says, offers investors a balanced approach.

The article cites comments from David Booth, co-founder of Dimensional Fund Advisors, who argues that trying to predict the future is a futile exercise: “When you have some money to invest, put it into low-cost, diversified index funds. Find a stock-bond mix that you are comfortable with. And if you realize you’re not comfortable, change it until you are—and then stick with it for years, and do better things with your life than worrying about where the market is going.”